Subjective wellbeing, use of payments and financial capability: an empirical analysis of Mexico

This thesis revisits the role that people’s engagement with their personal finances (and with tools generated to enhance such involvement) has on their financial behaviours and SWB. Specifically, the thesis aims to contribute to the SWB literature and to research about the psychology of payments in developing countries, such as Mexico, where financial inclusion is low, financial markets are less evolved, and the related literature is scarce. Adopting a microeconomics perspective grounded in behavioural economics (BE) insights, the thesis consists of three empirical chapters that evaluate distinct but related queries.

The first empirical chapter innovates by using Mexican Family Life Survey (MxFLS) panel data to develop measures of financial capability (FC)— that gauge attitudes, emotional reactions and cognitive-behavioural predispositions that guide people’s financial habits—and by evaluating whether the latter influence the extent of depression and anxiety among Mexicans. The chapter’s results showed that people with low FC (reflected through credit mismanagement and debt procrastination) experienced more symptoms of depression and anxiety than those with high FC (expressed in terms of better money monitoring habits). Results also revealed that, in our sample, the preferences of respondents’ future short-run selves were outweighed by their short-run present selves’ inclinations. Hence, the instantaneous pleasures forgone when undertaking patient (financial) choices loomed larger than the psychological gains from self-regulation, causing them to experience (on net) more depression symptoms.

The second empirical chapter investigates whether household financial balances, such as savings and debt levels—when considered as self-standing constructs (rather than resulting from FC attributes)—as well as debt to income (DTI) and debt to savings (DTS) ratios have any influence on people’s experience of depression. Also based on longitudinal MxFLS data, this chapter innovates by controlling for the impact of risk aversion (RA) and time-value (TV) preferences to explore whether such behavioural traits exert any influence over how debts and savings affect people’s SWB. Cross-sectional results evidenced a positive statistically significant relationship between depression and anxiety and respondents’ total debts overdue, debt to income (DTI) and debt to savings (DTS) ratios. The effects of total savings were less conclusive. Panel FE results revealed causal significant positive effects of debts and DTI ratios on depression and anxiety once time-invariant heterogeneity across respondents was controlled for. While cross-sectional results across both waves suggested a positive relationship between TV preferences and depression and anxiety, RA was only significant in the later period (2009) wave. None of the behavioural covariates revealed significant causal impacts on depression and anxiety once time-invariant unobservables such as engrained cultural values or the biological components of temperament were controlled away in FE panel estimations.

The third (and final) empirical chapter expands the literature on the behavioural effects of payments using the most recent wave (2021) of Mexico’s financial inclusion survey, to date the only existing survey in Mexico combining household-level sociodemographic indicators with payments use data allowing for micro-level analyses. Through multinomial logit regressions it evaluates the determinants of the use of different payment forms according to diverse transactions. The results revealed negative associations between cash usage and education, standard of living, financial knowledge, and residing in an urban area. Perceptions of subjective financial wellbeing (SFWB) and financial attitudes were positively related to using non-cash payments and age was inversely related with the use of digital payments. The last empirical chapter also analyses whether distinct non-cash payment methods, diversified by extent of physicality, influence financial management behaviours through interplay with people’s cognitive biases and mental accounting processes. We correct endogeneity from omitted variable bias through a novel technique that uses information about selection on observables to retrieve information about selection along unobservables. Bias-adjusted results showed that all psychological effects were stronger for digital payment forms and supported our conjecture that the more virtual the payment form, the more it can bypass cognitive functions that naturally rein in spending, thus potentially leading to compromised financial behaviours.